| The United States Department of the Interior manages the leasing of offshore tracts in the outer continental shelf for oil and gas exploration and production. Tracts are leased by conducting a sealed-bid auction. Most previous economic analyses focused on the relation between auction structure and the initial cash bonus paid for each tract. This study examines the impact of auction structure on ultimate exploration and production of oil, where oil is explicitly treated as an exhaustible non-renewable resource.;The second policy topic investigated is the effect of joint bidding on offshore exploration. Early analysis of the effect of joint bidding on direct auction revenues led the Government to adopt a joint bidding ban among the eight major oil companies. Joint bidding in general, and the bidding ban in particular, are shown in this study to have an effect on exploration, and thus on production. This result is achieved with the analysis of a static microeconomic model of firm behavior which incorporates uncertainty, along with econometric investigation of the historical record. Multiple linear regression and logit analysis of the data provide support for the hypothesis that joint ventures are more likely to engage in oil exploration on a tract than solo firms, other things equal. The corresponding higher quantity of produced oil should thus be considered, in addition to initial auction revenue effects, when a joint bidding policy is evaluated.;Two specific policy issues are analysed. The first is the impact of a profit-tax and royalty on optimal extraction. A fully dynamic theoretical model is developed to capture some of the special features of oil extraction from the firm's viewpoint. The model is solved using techniques taken from calculus of variations and differential equations. A tax on pure economic profit is verified to have no effect on production. A royalty, however, does alter the optimal production path, generally reducing output at any given time. The results are contrasted with previously formulated static and quasi-dynamic models. Example extraction, revenue, and cost paths through time are generated using a combination of analytic and numerical techniques. |
